Equities or bonds? Where to invest in a rising interest rate scenario

Equities and bond markets have been mired in uncertainty as global central banks turn off liquidity taps even as they stare at feeble economic growth due to the Ukraine-Russia war.
After three months into the new calendar year, returns from domestic benchmark indices remain nil.

Globally, the benchmark indices in Japan, China, the US, the UK, Russia, and Europe have given negative returns between 7 and 31 per cent. 
In the money market, the 10-year US bond yields have inched up over 70 per cent so far this year, while domestic yields have hardened 11.5 per cent.
 
A rise in bond yields indicates losses on the bonds an investor already owns.
And the road ahead isn’t getting easier.

According to analysts, the problem for equity investors is they are unclear where the peak in inflation is.
Fixed income or bond markets, on the other hand, fear that aggressive monetary policy will hit the economy, animal spirits and consumer demand.
 
As pointed out by Akash Prakash in a Business Standard Opinion piece, we are entering a dangerous phase for the US economy and markets. If the US yield curve inversion remains for 90 days, the US markets go into a significant decline, equity markets globally will struggle till differentiation sets in and the fundamentals prevail again.

Back home, the RBI’s Monetary Policy Committee retained its accommodative stance, but changed the wording to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward.

This, analysts say, hints that the RBI will likely change its policy stance to neutral in the June MPC meeting, setting the stage for a short rate hiking cycle in the second half of 2022.
Against this backdrop, where should investors park their money in a rising interest rate scenario?

Vijayakumar also says financials may also perform well in FY23 as rising interest rates will support interest income.
However, if someone is risk averse and prefers debt market over equities, Sunil Subramaniam suggests investing in floating interest rate-linked bond schemes.
 
Clearly, markets are in for a wild ride till inflation scenario becomes clearer and the Ukraine-Russia war ends with a mutually agreeable solution.
Given this, the movement in bond yields will dictate equity markets globally in the near-term.

On Wednesday, markets will react to the retail inflation data of India, and the US, and will track Q4 result of IT major Infosys.